While the Reserve Bank of India emphasized growth and maintained interest rates unchanged, bond yields corrected and equity markets rebounded on Thursday. The 10-year G-Sec yield fell more than 1% to 6.72% – it was down 2.5% or nearly 20 basis points over three days – and the benchmark Sensex closed at 58,926, a gain of 460 points or 0.8%.
Why didn’t RBI raise its rates?
The Monetary Policy Committee (MPC) has deemed that continued policy support – meaning status quo on interest rates and accommodative policy – is warranted for a sustained and broad-based recovery. He considered inflation and growth prospects, as well as uncertainties related to Omicron and the global fallout.
Retail price inflation for the next fiscal year (FY23) is projected at 4.5%, which is lower than previous projections. The panel said inflation is expected to moderate in the first half of 2022-2023 and move closer to the target rate thereafter, leaving room to remain accommodative.
Big borrowing in the FY23 market may also have caused RBI to delay a normalization of liquidity – an attempt to keep the cost of borrowing under control, an analyst said.
What does the status quo mean for the economy?
The market feared that rising inflation would cause the RBI to become hawkish and even take steps to withdraw liquidity from the economy. Leaving the Repo rate – at which RBI lends to commercial banks – and the reverse repo rate – at which RBI borrows from commercial banks, unchanged indicates that low interest rates will continue for the time being.
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The policy statement came as a surprise and relieved the markets. While the policy is in line with the government’s push for capital investment this year, it may also support corporate borrowing – in this sense, continued low interest rates bode well for consumer demand. and investments in the economy.
“Contrary to market expectations, RBI maintained its status quo on rates and its accommodative policy. This will accelerate the growth momentum of the economy,” said Rajiv Sabharwal, Managing Director and CEO of Tata Capital Ltd.
Economists said a key reason the RBI has kept the key interest rate at historic lows for longer is to spur a more sustainable rebound in private consumption.
“It is believed that as a strong rabi harvest boosts food supplies in April-June and supply disruptions resulting from the third wave of the pandemic ease, CPI inflation will moderate, allowing policy rates to stay lower for longer than in the developed world. This will boost equity valuations and help spur a broad-based recovery in consumption and investment,” said Prasenjit K Basu, Chief Economist, ICICI Securities.
And what does this mean for borrowers and savers?
Borrowers, especially home buyers, will benefit as lending rates are unlikely to rise in the near future. “One of the big factors motivating people to buy a home is record low mortgage rates. With the policy rate unchanged, lenders will continue to maintain the prevailing low interest rate on home loans,” said Samantak Das, Chief Economist and Head of Research and REIS at JLL India.
The total home loan outstanding was Rs 14.90 lakh crore in November 2021, and the personal loan outstanding was Rs 29.85 lakh crore. While the RBI reduced the repo rate to 4.0% in February 2020 and the reverse repo rate to 3.35%, banks have significantly reduced their interest rates (both on deposits and loans).
Savers and depositors, meanwhile, will see their interest income unchanged. Given inflation of 5.59% in December, depositors are recording a nominal loss on one-year term deposits. The State Bank of India offers 5.10% interest on one-year term deposits.
What about debt and equity investors?
Although RBI has not followed global central banks in tightening interest rates, the market is pricing in a rate hike later this calendar year. Experts say debt investors should ideally keep their funds liquid and deploy them over the next year as interest rates rise.
“Investors looking to allocate to debt strategies are advised to look at fund segments with lower duration profiles and use target maturity strategies to lock in progressively higher rates over the 6 next 12 months,” Axis MF said in a note.
Fund managers also believe bond yields can remain volatile and investors should be vigilant. “Continued volatility in market rates remains the base case as there does not appear to be a clear fundamental reason to validate lower rates, other than continued dovishness and the absence of preemptive actions. policy normalization from the central bank,” said Rajeev Radhakrishnan, CIO-Fixed Income, SBI. Mutual fund.
As for equity investors, the continued low interest rates and dovish monetary policy stance means equity valuations will rise further for now. RBI’s focus on growth is likely to push stock markets higher.
Challenges will come, however, from rising global interest rates and outflows from Indian equities.